Asking the right questions
Updated: 2012-10-08 13:37
By Gerard Lyons (China Daily)
If you ask the wrong question, you will get the wrong answer. In economics and politics, it seems that all too often the wrong question is asked. Across Europe, for instance, too few are asking the key question about where growth is going to come from. Across Asia and large parts of the Middle East and Africa, meanwhile, the key issue for business is China. But what is the key question that should be asked?
The question financial markets are asking is whether it is going to be a hard or a soft landing. A soft-landing is where growth slows gradually to around 6 percent or so. A hard landing is where growth either falls abruptly or continues to slow toward zero, or not far above it. Over the past year, China slowed significantly. It is already having a soft landing.
In some respects, people, both within and outside China, have almost become too used to strong growth. Throughout this century, China has achieved double-digit growth, or very close to it. At a recent speech in Tianjin, I was in the audience as Premier Wen Jiabao gave an impressive summary of China's last decade; it included the remarkable fact that living standards have risen five-fold during that time. After such a track record, it would be no surprise if there was a setback.
Indeed, as China's economy grows larger, I think a setback becomes more likely. In part, this is because the business cycle exists in China, as elsewhere. But it is also because China's policymaking setup and its institutional framework have not kept pace with the economy's growth.
The question, hence, should not be whether China will have a setback, but when will it be and how China will cope?
The mood of the international and Chinese businesspeople in Tianjin was one of uncertainty, not one of pessimism toward China. The issue was not about where China's economy was heading but how it would get there. The destination was a stronger, wealthier and more powerful economy. The path, though, was uncertain and strewn with challenges.
China needs a new growth model. China is moving from an investment- and export-led economy to one driven more by consumer spending. Investment is more than 48 percent of China's economy. This is an incredibly high ratio and compares with a global average of around 22 percent. China wants to lower this ratio, but to a still high figure between 38 and 40 percent because of urbanization and continued industrialization.
High investment leaves China vulnerable to a loss of confidence. It would require investment to decline only by one-tenth to knock 4.8 percent off economic growth. That is why the current soft landing could always turn out to be harder, particularly if confidence dips.
While China wants the share of investment to fall, last year's 12th Five-Year Plan (2011-15) was aimed at boosting consumption, social welfare, and a green economy, and at moving the country into higher-valued-added areas.
China was hit hard by the global recession as exports slowed. It then unveiled a huge fiscal stimulus. Although the economy rebounded strongly, the authorities appear reluctant to repeat the scale of that boost now.
In his speech, Wen emphasized China's main current themes: a prudent fiscal policy and a proactive monetary policy. The message was not to worry about the slowdown getting out of hand, because the authorities will ease policy to prevent growth weakening too much. Indeed, since May, the authorities have eased policy.
The question is, how much of a slowdown? Until two months ago, there was a clear divide. Exporters, hit by weak global demand, were complaining. In contrast, companies selling to China's domestic market were in good shape. More recently, particularly as the euro crisis escalated, the weakness from exporters spread, having an impact on manufacturing and weighing on domestic spending. Chinese people have become less confident in recent times. But as many as 11 million new jobs have been created this year.
The pace and scale of change in China is huge, so too is its catch-up potential. For instance, China's income-per-head is only 18 percent of that in the United States.
Yet China's biggest challenge is its institutional setup. It is still run from Beijing. Also, its financial system is repressed, with big constraints in place. This means that, unlike in the US, the transmission mechanism of monetary policy is not always smooth. Perhaps, the surprise might be a more reformist agenda.
We should also not be surprised by what happens on the strategic side. The South and East China Seas are increasingly becoming diplomatic hotspots. And a greater US naval presence in the Asia-Pacific region is only likely to reinforce that.
Perhaps the key questions, therefore, should be: "Where are the greatest shocks ahead for China?" and "Will China be able to cope?"
Putting recent developments alongside the imbalanced nature of China's economy, the implication is clear: do not be surprised if there are slowdowns like the one we are seeing now. But even if there were a setback, it would not mean that China's economic boom is over.
China is not the first country to enter a new phase of growth. It is called the middle-income trap. For any economy, a move from low- to middle-income status - as China has achieved - is much easier than the challenge of taking the next step to becoming a high-income economy. Usually, one in three every country succeeds in taking that next step. I think China will be one of them, but it is not going to be easy.
Last December, I forecast that global growth will be only 2.2 percent this year because of recession in Europe and the United Kingdom, only steady growth in the US, and a slowdown in China. That was one of the weakest forecasts, and it has been proved correct. The current situation is also highly uncertain.
Yet, despite likely weaknesses in the coming months, global growth should pick up modestly next year and, if it does, China will play a key role.
The author is chief economist and group head of Global Research at Standard Chartered Bank.